Gavekal Capital: Nuance Communications January 2014 Puts Spike Higher

Tuesday, November 26, 2013

Nuance Communications is the worst performing stock in the MSCI World index today.

StrreatAccount offers the following synopsis of last night's earnings release:

Stock is trading down ~7.7% following last night's Q4 earnings release, with a $0.02 EPS beat driven by better than expected revenue and in-line margins, though the company saw y/y organic growth declines across all product markets. Analysts were slightly disappointed by Healthcare revenue missing consensus expectations, attributed in part to he transition from traditional transcription business to EHR solutions, though Mobile and Enterprise provided modest upside surprise.

Despite the solid Q4 print, analysts generally attributed the after-hours sell-off to initial F14 guidance. Revenue guidance of $2.03-2.09B bracketed FactSet consensus $2.07B, though several notes suggested that the target could prove somewhat aggressive given the pace of implied quarterly sequential acceleration necessary hit the range. Management's EPS guidance was of greater focus, with a $1.05-1.15 range coming in well below FactSet $1.42, as the company noted it will require continued investment in R&D, sales and marketing to drive revenue growth during the ongoing transition to on-demand offerings.

Management also offered constructive commentary around bookings trends across most segments, particularly highlighting Healthcare and Enterprise, with an initial F14 guidance range of $2.15-2.25B representing ~15% y/y growth. However, analysts noted that these trends were not apparent in F13 results and may not influence revenue realizations until the back half of the coming fiscal year.

Looking ahead, analysts note they will be looking for indications of a re-acceleration of organic revenue growth during the company's difficult transition to a subscription model. Secular headwinds are expected to persist in F14, and analysts note shares may be fully valued given limited expectations for an improving growth trajectory in the near-term. A quick look at sell-side sentiment shows 42% of firms keeping Buy-equivalent ratings compared to a 49% average for the S&P 500; average price target of $22.33 represents a 51% premium to current levels

The January 2014 $12 puts are up 127% in active trading following the announcement.

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